Why we spend money on umbrella insurance

First of all, what is an umbrella insurance?

An umbrella insurance policy is extra liability insurance coverage that goes beyond the limits of the insured's homeowners, auto or watercraft insurance. It provides an additional layer of security to those who are at risk of being sued for damages to other people's property or injuries caused to others in an accident. It also protects against libel, vandalism, slander, and invasion of privacy.- Investopedia 

But I do not agree with the following …

The added coverage provided by an umbrella insurance policy is most useful to high net worth individuals who own a lot of assets or very expensive assets and are at significant risk of being sued.

After all, a sizable judgement can claim not only your existing assets, but also your future earnings. 

In order to purchase an umbrella policy, you’re required to have $300K liability coverage in your auto and home insurance. You may think that a $300K settlement is rare, but in fact, it may not be as rare as you think. Here are some examples of umbrella insurance claims. 

Let’s be clear. You do not want to be under uninsured when it comes to personal liability coverage. A serious injury involving significant lost wages and/or lifetime medical care can lead to a catastrophic settlement. 

For our family, we choose to have umbrella coverage for a number of reasons.

#1 Liability coverage Lawsuit seems to be in everyone’s mind when it comes to liability. My friend told me a story. She was babysitting two 5 years old boys in a play date. One of them misfired a toy gun and hit the other’s face. The other boy immediately said, “you’re lucky that you hit my face. If you hit my eyes, I will sue you”. Seriously, that’s a 5 years old!!

#2 Do you drive a car? From the insurance perspective, chances of having claims filed against auto insurance are a lot higher than home insurances. After all, auto vehicles are not a stationary objects and they can be operated at certain speeds, so that totally makes sense. Our umbrella insurance covers all 3 of our cars, our home and our rentals. But if you look closely at the breakdown of the coverage, each additional car increases our premium while our homes and rentals basically are free-riders in the policy. 

#3 Do you have a rental? When we started out having rentals, we would like to set up an LLC to host all of them. I do believe it is a good practice to have an LLC especially if you plan to have multiple rentals under your belt. Due to timings and loan complications, we ended up purchasing the rentals under our own names. Nevertheless, since we do not have the LLC to separate our rentals from our personal assets, we have the umbrella policy to protect ourselves. Is this the best practice? It may not be. But we are comfortable with this level of protection at this moment. After all, an LLC is not going to protect your asset absolutely as the judge can also pierce the veil of LLC during litigation.

#4 Do you have a family depending on you financially? When it comes to settlement over a lawsuit, not only your present asset, your future earning is also at stake. Imagine, you receive a judgement of $750K, and your insurance is maxed out at $250K. You have to cover the remaining $500K, and your future earnings can also be garnished. In this case, your spouse and kids would be the collateral damage in the lawsuit.

#5 Do you have kids? When you have kids, you may be asked to chaperon kids for field trips. Should an unfortunate accident happen, you may be charged with negligence. What if your little one’s BFF accidentally gets injured when coming over for a play date? Yup, most of us can assume that some bruises or even broken arms are parts of normal childhoods. But do the parents of the injured kid think the same way?

#6 Umbrella insurance is actually not that expensive. An umbrella insurance covering two cars and one house with a payout of $1M costs around $150 to $300 annually. For us, we believe it is money well spent.

#7 Legal defense cost When it comes to any sort of lawsuit, the legal fees can be very expensive. Not only that, for most of us who do not have any experience dealing with law firms, finding the right lawyer can also be a daunting task as well. If you have the insurance company liable for the potential settlement, it is simply its best interest to defend you. In addition, if you’re sued, your umbrella policy will cover the defenses cost, regardless if it is your fault or not. On top of that, the defenses fee is in addition to the limit in your liability coverage.

The Final Verdict

Ultimately, it comes down to this final reason for having the umbrella insurance.

#8 Peace of mind We value the peace of mind knowing that we are adequately covered in case we run into unfortunate circumstances. It provides a safety net for our family. For some families, considering the unlikelihood of filing a claim in the umbrella insurance, they may dismiss the idea of having one right away. For us, we always try to prepare for the worst, so the benefits of the umbrella policy outweighs the cost.

And, one last reason which does not apply to us, but apply to a lot of families …

#9 Do you have a dog? If your dog accidentally hurts someone, you may face a lawsuit. Your dog may be really well trained, but accidents happen all the time. And should you take the chance? By the way, this reason is applicable to all kinds of pets that can potentially cause harm to others.

Do you have enough coverage from your auto insurance?

Last week, I came across this question on biggerpockets. It was from 5 years ago, but it is definitely relevant to 2020 as well. Sarah was at fault in an auto accident, and the injured party sued her for a payout of $200K due to the level of injury which was well above the limit of $15K in her policy. Sarah worried that she might lose her recently bought home over this lawsuit. I am sorry for both Sarah and the injured party. This mess over liability would have been totally avoidable if Sarah had purchased her auto insurance with the right amount of coverage.

Do you think you’re adequately insured? If you are not, what happened to Sarah can also happen to you.

In this era of competitive pricing and online quotes, most people may not have an insurance agent to explain their policies to them. Well, to be honest, only good agents bother to explain to you what you’re buying. If you don’t have a good agent, or you do not put too much thought into your policy, you probably just do a quick search online and may opt for the cheapest quote online. But that may only provide the bare minimum coverage required by law. Is that enough? How much do you need in liability coverage?

For example, California requires drivers to carry at least $15,000 per person / $30,000 per accident for bodily injury in auto insurance coverage. In some states, such as New Hampshire, it is not even required by law to carry an auto insurance. However, is no or bare minimum coverage right for you?

For me, the most important coverage in auto insurance is the liability coverage. Property damage is always limited to the value of the property. If you are at fault and total a Tesla/BMW/Porsche, you’re only liable for a fixed amount, i.e. $80K. Yes, it is a lot of money, BUT that’s it. However, when it comes to bodily injury liability, i.e. the injury resulted from the accident, there is essentially no limit on how much you can be responsible for. 

You get a policy not only to fulfill the requirement of the law, but also to protect others and yourself. If you carry an insurance with just the minimum coverage required in the state of California, the policy pays up to $15K per person involved in the accident and up to $30K per accident. In other words, if the injuries from the accident makes someone not able to work for 6 months along with intense physical therapy or even surgery, do you think $15K is enough? Absolutely not! 

The Final Verdict

Please seriously consider purchase a policy that provides reasonable coverage to protect others and yourself. It is definitely in your best interest to protect your assets in case of an at-fault accident. If your policy only provides a bare minimum payout, the injured party can sue you to pay for the rest of the damage that you bring to someone’s life. A judgement from the court can seize your assets to pay for the medical bills and loss of income. You can lose all your savings and your home. In addition, your future earnings can also be at stake and garnished until the judgement is fulfilled. 

Besides, if you could just put yourself in someone’s shoes, you also want whoever at fault in the accident to at least pick up the medical bills and cover your lost income during your recovery time. In a way, it is a social responsibility to have adequate coverage in your policy to cover injuries in a major accident. We all know how crazy hospital and medical bills can be.

Even if you are still a student, without much in your bank account or without any substantial assert, it is still wise to pay a higher premium to have a reasonable personal liability coverage. For our families, we opt for the higher coverage of $250,000 per person, $500,000 per accident, and $100,000 property damage for the peace of mind, and on top of that, we also purchase an umbrella policy to cover the highly unexpected

After all, we pay for insurance policy but we hope we do not need to use it. Yet, when we do need to use it, we count on it to serve its purpose. Act now and make it yours 2020 resolution! Check your policy and make sure you are adequately covered and protected!